The Dollar Gains Traction despite Yield Differential Decline

The US government closure continues to weigh on investors sentiment pushing US yields lower and weighing on riskier assets. The dollar recovered some ground against the yen after moving lower toward support on Monday. The 10-year yield tested the 2.6% level before bouncing back to 2.65%.

Japan reported a smaller than expected current account surplus. The trade deficit declined to 886 billion yen from 943 billion yen. The reduction in the broader current account surplus was largely a function of the drop in the investment income balance.

Tuesday’s rebound in the USDJPY comes despite a decline in the yield differential between the US 10-year yield and the Japanese Government bonds. The yield differential is the difference between each countries interest rate, which is generally a driving force behind the forward rates for a currency pair. The forward rates and the spot rate of a currency are generally highly correlated which is why the differential is often used as a guide for future movements of a currency pair. The 10-year yield differential has moved from a high of nearly 205 basis points to 183 basis points over the course of the last two weeks. A break below the 180 basis point level could lead to a test of 170 basis points.

The USDJPY bounced near support at 96.80, and is poised to test resistance near the 10-day moving average at 97.78. A close above this level could lead to a test of the recent highs near 100. Momentum on the currency pair is negative with the MACD (moving average convergence divergence) index printing in negative territory with a negative trajectory. The RSI (relative strength index) which is an oscillator that measures overbought and oversold levels is printing near 41, which is on the lower end of the neutral range.

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